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Saturday, December 22, 2012

Taken from the comments on my last post on MMT/Chicago Plan/FRB & several similar pages the Questions below seem to be the central questions/objections between Full RB & MMT (or Post Keynesian, or MR).

Answering them clearly I think could reduce “talking past” each other. These Qs touch on the most fundamental differences, avoiding digressions.

Help in answering these is greatly appreciated. (PS Is using the comment section below uncomfortable? I may try to set up a wiki if enough people want).

17 comments:

Clint. I could not get past the spam filter at your place and lost my comment. I am posting it here.

There is a difference between the MMT POV and its policy position. The MMT POV is simply a description of the currency monetary regime, which BTW is global and so there is a general description of how a fiat system with central banking operates and description of specific cases in different nations. MMT as a POV sets forth no policy in such a description. MMT also has a macro component that contains an analysis of the possibilities that a fiat regime provides wrt policy space and how to use this policy space to harmonize the trifecta of growth (production-productivity), employment, and price stability in order to achieve and maintain optimal use of resources, full employment and price stability.

MMT economists do not have a general policy position that covers all policy, but none of them that I know of think that FRB is a policy that should be adopted in favor of any other in order to improve the existing system.

There is never a "perfect" solution. All options have advantages and disadvantages. The MMT economists do not see the advantages of FRB over the disadvantages as being superior to all other solutions to the design problem.

Warren Mosler has put forward an MMT-based policy position proposals that are available at moslereconomics.com. Basically it involves using fiscal policy iaw MMT principles instead of monetary policy, formally consolidating the cb and treasury functions under Treasury, setting the overnight rate to zero, issuing tsys in max duration of 3 mo, and revising the banking and financial system iaw his proposal, which would return banking to intermediation (risk management) and end financial engineering and prop trading (risk taking).

On the other hand, Bill Mitchell has said he would prefer nationalizing banking.

Politically, the issue is distribution of power between the public and private sectors. There are a range of options between the extremes of 100% public and 100% private. The debate needs to be about the advantages and disadvantages of the various options.

In the end, whichever option is chosen should the system be changed, it has to be compatible with the MMT POV, in the sense of being "ruled by arithmetic" and supportive of efficient and effective SFC macro-based economic policy.

Assuming for the sake of discussion some practical scheme for eliminating endogenous money creation I think it comes down to a pretty basic set of trade-offs.

You can have an economy with low risk of financial shenanigans but a deflationary bias from having made real the loanable funds model. It relies heavily on the government policy to exercise prior, timely good judgement on the money supply to avoid stifling private growth impulses.

Or you can have a growth-biased economy that allows the private sector to fund its own growth through endogenous credit creation with the government following behind to ratify and stabilize that growth through fiscal injections. It relies heavily on the deployment of smart policy and regulation to filter unproductive, rent seeking financialization to avoid bubble-bust debt deflation while still accommodating productive investment.

For me it's an easy choice. I'll always prefer to place my bets on endogenously driven private sector growth leading the way and accept the challenge of deploying smart government policy and regulation to keep it from eating itself. As opposed to a private sector on rails able to go no further or faster than the government lays down track in front of it.

At the moment – right now – the U.S. economy is being hampered by a collection of twits in government who can’t “lay down track” at the right speed. (The problems in Europe are a bit different). So I don’t think your track laying point is an inherent disadvantage of full reserve banking.

Re Tom’s point about Bill Mitchell being in favour of nationalising banks, I think the ultra-important point is the RULES GOVERNING banks. Whether they are nationalised or not is a minor issue. Banks in the UK are already half nationalised thanks to the bail-outs they got from government during the crisis. But I haven’t heard anything about government representatives on bank boards making rousing speeches and producing brilliant ideas. They’re probably just a collection of bureaucrats who turn up, drink tea and try to avoid going to sleep at board meetings.

For me it's an easy choice. I'll always prefer to place my bets on endogenously driven private sector growth leading the way and accept the challenge of deploying smart government policy and regulation to keep it from eating itself. As opposed to a private sector on rails able to go no further or faster than the government lays down track in front of it.

Assuming for the sake of discussion some practical scheme for eliminating endogenous money creation ... Geerussel

A government backed/enforced credit cartel is not the only means of "endogenous money creation"; common stock is a perfectly ethical, democratic (at least per share) private money form that requires no reserves, no central bank, no usury and no intrinsically valuable money. It "shares" wealth and power rather than concentrates them unjustly as the credit cartel does.

The central flaw in fractional reserve banking (i.e. the existing banking system) is that it just cannot do without taxpayer backing – i.e. it cannot do with a subsidy. That’s not capitalism. It’s not free market economics. Full reserve banking, in contrast, does not need a subsidy.

Fractional banks fail, and keep on failing for a very simple reason. They accept deposits and promise to return the EXACT SUM deposited, while investing that money in loans or investments that are not 100% safe. That works nine years out of ten. But sooner or later every bank makes a string of bad loans, and goes under. So taxpayers come riding to the rescue to save depositors. It’s a Ponzi scheme.

Banks toppled like nine pins in the 1800s and the 1930s. Bank like institutions failed in the savings and loan fiasco. Lehmans failed and dozens of others would have failed in the recent crisis but for taxpayer bail outs.

How many more failures do we need before everyone gets the message: FRATIONAL RESERVE BANKS FAIL.

Under full reserve, anyone who wants their bank to lend on or invest their money bears the loss if those loans or investments go wrong, and quite right. Thus it’s almost impossible for banks as such to fail.

Philosophically, a government backed/enforced money cartel is inconsistent with a free market economy and not at all necessary from a practical viewpoint since common stock as private money allows all the endogenous money creation necessary and without the ethical and stability (the boom-bust cycle) problems of the current system.

Usury alone is unstable since the debt eventually compounds faster than real economic growth. Add money lent into existence ("credit") to usury and it is far worse since people are driven into debt or else priced out of the market by negative real interest rates.

Why do people defend credit creation when 1) It requires extensive government privileges2) is unethical 3) is unstable and4) is unnecessary?

Frlbane claims “a government backed/enforced money cartel is inconsistent with a free market economy”. I favour free markets wherever possible, but the problem with Frlbane’s argument is that money is not a free market construct.

First, money did not originate, thousands of years ago, from market forces: it arose out of governments’ / kings / emperor’s desire to collect taxes.

Second, as MMT literature often points out, money has value largely because it is needed in order to pay taxes to governments.

Third, I you Google the words “money” and “social construct” you’ll find plenty of explanations as why money is essentially a government or societal thing.

"Second, as MMT literature often points out, money has value largely because it is needed in order to pay taxes to governments."

I disagree because federal taxation is used to regulate inflation, and people are not required to pay the tax until after they receive income.

The value money has largely comes from the goods and services created by federal government purchases as a currency issuer. It also creates a common accounting for private transactions which has it's own efficiencies. If you want to reach a general audience I think this point needs to be made.

Hence Defense Dept. Keynesianism. Notice also that the military gives training for free because of the value of education, they also pay people to be educated. As opposed to college education which was handed over to the parasites.

And the "deficit" is just the federal accounting balance. The goods and services also depreciate over time and so I think taxation also reflects this.

Yes, taxes generate a need to obtain the currency, which then gives govt access to private markets denominated in the currency through which it can transfer private resources to public use by issuing the currency.

The value of the currency is determined separately from taxation. Fundamentally, value of the currency is based on the price that govt pays for resources as the monopoly issuer.

With a fixed rate this is dependent on what the rate is fixed to, e.g., a certain weight of gold at a fixed conversion price. With a floating rate currency there is no fixed numeraire independent of the currency, unless a price anchor is set, e.g., price of an hour of unskilled labor in the case of the MMT JG.

But the value of the currency is also relative to other currencies and this is determined by relative factors that include other countries policies and economies.

Clint Ballinger has asked me to put the Positive Money response to geerussell's comment of December 22nd concerning the funding of productive investment via a loanable funds model augmented by exogenous creation of money or "a growth-biased economy" relying on endogenous credit creation.

I should first make it clear that the Positive Money proposals do not have any problems with trade credit. Trade credit is the essential driver of production. It fosters the mutual cooperative interdependence of producer and supplier assuring continuity of supply and demand. Trade credit is fine. It is the mutation of trade credit into currency - bank money - which our proposals will abolish.

In 1986 when banking and financial services were deregulated in the UK, allowing banks to originate and trade in what Warren Buffet famously called "financial weapons of mass destruction", total sterling bank lending to UK residents was about equal to real annual GDP valued at 2009 prices, with around 55% being on loan to finance productive investment and consumption, the remainder being lending to the FIRE sectors - finance, insurance and real estate (including homeowner mortgages). 25 years later, real GDP had risen by 80%, bank lending into the real economy was 350% higher but lending to the FIRE sectors had jumped by 1,750 percent to make up over 75% of total lending.